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High Crop Prices: The Good,

The Bad, and The Ugly

Daryll E. Ray University of Tennessee

Agricultural Policy Analysis Center

65th Annual Meeting of the Southern Legislative Conference

Memphis, Tennessee

July 17, 2011

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High Crop Prices: The Short-Run

• Crop farmers become euphoric – $7/bu corn, $14/bu soybeans, and $1/lb cotton

– Never thought they will see the day…

– Paying bills—not a problem

• Livestock/poultry/dairy producers, well… – They didn’t think they would see the day

either!!

– Had become accustomed to buying feed for well below the its cost of production

– Put many out-of-business

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High Crop Prices: The Short-Run

• “Ingredient” demanders complain loudly – Food sector threatens to, or raise, prices

– Even though the farm ingredients’ share of food costs is often very small (bread, cereal…)

– The impact on meat does not hit until months or years later

• Rural communities and farmer trade areas – Reminded of the impact of farmers having

ready cash

– Good time to be a John Deere or pickup dealer

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High Crop Prices: The Second

Impact

• Farm resource and input prices sky rocket – Seed, pesticide, fertilizer suppliers raise

prices (and not just a little bit)

– Land cash rents and land values increase at double digit rates per year

– Returning to “previous” price levels would be a real problem

• Livestock production is adjusted downward; prices and profits increase

• Now food prices are affected more directly

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High Crop Prices: The Long-Run

• Both the crop and livestock production-sectors become more concentrated – Many livestock/poultries/dairies did not

survive—fewer operations

– Crop farmers who are already large-scale, well-capitalized, and now cash-rich, expand even faster

• Crop producers here and abroad expand output like crazy – Guess what happens then…

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High Crop Prices: The Long-Run

• Historically, crop prices plummet – Land prices drop, sometimes by a lot

– In the U.S., government usually comes to the rescue but does not make it all better, just better

– Years of “excess” crop production and “low” prices return with a vengeance

• Historically, but not always, right?

• Wrong: No exceptions so far

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But Things Are Different This Time

• Could be… – China could become an insatiable demander

of US commodities; other countries too

– World population is projected to double

– Weather “abnormalities” could escalate, jeopardizing yields worldwide

– Doubling of energy prices or other factors could limit use of agricultural inputs

– Water shortages, etc., etc.

• Could be, but a certainty—it is not

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Things to Consider…

• Repeat of ethanol grain demand growth over the next 5 years will not happen

• That essentially leaves exports as the source of U.S. demand growth, & implies… – Developing countries willingly source food

needs outside their country

– The U.S. will be the dominant provider of any increase that occurs

• And then there is the tendency to focus on demand growth and not supply potential

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Do Developing Countries

Willingly Out-Source Food? • FOOD IS DIFFERENT

– Food is a national security issue—just like

military security is to the US. So … • Countries want to domestically produce as much of their

food staples as possible

• Political considerations

– Need to feed the population

– Need to provide a living for millions in agriculture

– Need an orderly exit of workers out of agriculture

– Food imports from outside countries • Often do not grow as fast as a straight

economic analysis might suggest

• Don’t increase much when prices drop

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Would the U.S. Fare Well If Grain

Export Demand Explodes?

• The obvious answer would seem to be YES

• Look at soybean and cotton exports in recent years

• But has the reality of crop export growth over recent decades fallen short of expectations/reality/rhetoric?

• Well, let’s go back a few decades and see

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Export Demand Did Explode in the

1970s

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops

1979=1.0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Population

US Exports *Adjusted for grain exported in meat

US Domestic Demand

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The Following Decades…

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops

1979=1.0

US Population

US Exports

US Domestic Demand

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US and World exports of 5 Grains and

Soybeans, 1980-2010

Millio

n M

etr

ic T

on

s

World Exports of 5 Grains and Soybeans

US Exports of 5 Grains and Soybeans

217 MMT

360 MMT

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US Percent of and World exports of 5 grains

and soybeans, 1980-2010

Perc

en

t

US 5 Grains and Soybean Exports as % of World 58%

37%

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US Soybean Exports Are

Sure Enough Going Up

0

5

10

15

20

25

30

35

40

1965 1970 1975 1980 1985 1990 1995 2000 2005

Millio

n M

etr

ic T

on

s US Exports

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But Brazil’s Exports Have

Gone Up by More…

Millio

n M

etr

ic T

on

s

Brazil Exports

US Exports

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So the US Share of World Exports

Has Dropped Precipitously

0

10

20

30

40

50

60

70

80

90

100

1965 1970 1975 1980 1985 1990 1995 2000 2005

Perc

en

t

US Soybean Exports

as % of World Exports

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Post-70s: Developing-Country

Competitors Did Well

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam

15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower,

Copra, and Palm Kernel

Th

ou

san

d M

etr

ic T

on

s

US Exports

Developing Competitors’ Exports

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Before We Leave Exports…

• Our President has set a goal of doubling

the value of US exports in 5 years

• Our Sec. of Agr. says don’t expect that

from agriculture

– Wise warning—In fact, odds are that

agricultural export value will drop, not

increase, in the next few years

– Most of the mammoth increase in the value

of exports over the last 3 years came from

price not volume (will prices continue to grow?)

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US Corn, Soybeans, and Wheat –

Value and Volume of Exports

0

50

100

150

200

250

300

1980 1985 1990 1995 2000 20050

5

10

15

20

25

30

Vo

lum

e o

f E

xp

ort

s

Value of Exports

Volume of Exports

Billio

n D

olla

rs

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Finally, It’s Easy to

Underestimate Supply Growth

• Let’ begin with the US:

– Investment in yield enhancing technology

(300 bu./ac on best land in a few

years?—national average a decade or two

later??)

– Potential conversion to cellulosic

feedstocks for ethanol expansion

– Conversion of Conservation Reserve

Program Acreage and hay/pasture land to

crop production

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It’s Easy to Underestimate

Supply Growth

• International supply growth—yield

–Development and adoption of

drought/saline/disease resistant crops

–Globalization of agribusiness: Near

universal access to the new

technologies world-wide

• Narrowing of technology and yield differentials

between the developed and developing world

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It’s Easy to Under Estimate

Supply Growth • International supply growth—acreage

– Long-run land potentially available for major

crops

• Savannah land in Brazil (250 mil. ac. -- USDA says 350)

• Savannah land in Venezuela, Guyana, and Peru (200

mil. ac.)

• Land in former Soviet Union (100 mil. ac.)

• Arid land in China’s west (100 mil. ac. GMO wheat)

• Savannah land in Sub-Saharan Africa (300 mil. ac.

-- 10 percent of 3.1 bil. ac. of Savannah land)

• Supply growth has always caught and then

surpassed demand growth (and it does not take long)

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Policy for All Seasons

• A policy that – Protects farmers during “hard times”

– Does not pile-on during the “good times”

• In contrast Direct Payments

– are paid even though prices are well north of all costs

– but provide insufficient help when prices are depressed

• In contrast Revenue Insurance

– protect farmers’ “pure” profits when prices are really high

– but when prices fall and remain below the cost of production,

revenue insurance guarantee a percentage of those even-

below-variable-cost prices

• A policy that – Helps ensure supply availability for domestic

and export markets

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Policy for All Seasons

• Assume the unexpected will happen

– Random policy and weather events do

occur—Plan for them

• Establishment of Grain/Oilseed/Food

Reserves

– Moderate impacts of random policy and

weather events by providing stable

supply until production recovers

– Operated/overseen by a multinational

commission

– Stores strategically purchased reserves

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Policy for All Seasons

• Keep productive capacity well ahead

of demand

– Public investment in yield enhancing

technologies and practices

• Provide means to hold arable land in

rotating fallow during periods of

overproduction

– This land could then quickly be returned

to production in the case of a crisis

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Agricultural Policy Analysis Center

The University of Tennessee

310 Morgan Hall

2621 Morgan Circle

Knoxville, TN 37996-4519

www.agpolicy.org

Thank You

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